A low-tier character is a character that for some reason or other, is worse than most of the rest of the cast in the game.
There is no such thing as a perfectly-balanced game, so no matter which game you play, there will be characters who can do pretty well. ...and then there’s the low-tier guys.
Sometimes, there are brazenly weak characters that are clearly a mistake on the developers’ part, and sometimes these characters are originally thought to be high-tier, but move down the rankings as players reveal the game’s true intricacies.
While they have less of a shot at winning against anyone, they may still have a good matchup or two, and the challenge of a serious disadvantage can be exciting, or a good way of holding back against someone of lower skill.
Of course, some jerks just use it as an excuse for losing. Wimps!
Some low-tier characters are clearly meant to be such. Dan from the Street Fighter Alpha series (a parody of SNK fighters, particularly from the Art of Fighting trilogy), and Sean from Street Fighter III (much to his own chagrin) are joke characters (see flavor), issued as a challenge to fans of the genre.